For the most part, we all know what commercial real estate is, and have spent a good part of our lives within commercial property. While just about everyone learns about residential property at some point in their lives, the details surrounding commercial real estate don’t become clear until you are in need of an office or retail space for your business.
So what is commercial real estate, how does it differ from residential, and when should you consider purchasing or leasing it? We’ll answer all of these questions and more below.
What is Commercial Real Estate?
Let’s start with the basics—commercial real estate is essentially business property. This could mean an office building, restaurant, mall, or boutique. Basically any property that is used for the sale of goods or services.
Typically, businesses lease commercial space from whoever owns it. Think about an office building that includes a law office, restaurant, book store, and an industrial supply store. Each of these businesses would pay rent to the individual or company that owns the property.
The individual stores within a mall or strip mall, and restaurants within a food court, tend to rent the retail space as well.
Some commercial real estate buildings may be made up of a large commercial space, like a mall or building, while others are single spaces, such as a restaurant, coffee shop, or a standalone store.
What’s in a Commercial Lease?
Commercial leases tend to be for longer periods, and allow for things that residential leases do not, such as:
- Renovations to match branding or professional needs (as permitted by a landlord)
- Exclusive use, which can limit how many professionals in the same industry use the building
- Parking for customers, which may be included in the rent, or added as a fee
- Property taxes and operating costs/utilities for the building as a whole
- Business terms, such as what the space may be used for
In a commercial lease, the landlord or owner of the property may choose what to allow on the property, and whether or not they will assist in the cost for renovations for certain businesses. It’s up to the landlord to make sure that the building is up to code for the types of businesses that will be operating within it, and that the property is zoned for commercial use.
It is the tenant’s responsibility to pay rent on time, adhere to the lease agreement, and avoid any illegal activity.
Leasing Commercial Real Estate
If you have, or are considering starting a small business, it’s a good idea to get an idea of what your options are in terms of leasing commercial space prior to making a commitment. You need to find something that both accommodates your business needs as well as your financial position.
When considering commercial real estate for your business, it isn’t a question of simply whether or not you need it. It’s a question of what kind you need, and what your options are within that specification.
Professional Office Space
Maybe you’re an entrepreneur who offers writing, marketing, or design services, and need a place to meet with clients. It could be that coffee shops are no longer cutting it, and you have enough business now to require a professional space to conduct your work.
Obviously, you’ll want some sort of office space, but do you really want to rent a whole office just for you? It could be costly, which may take away from its value if you’re not making good use of it during the week.
To overcome this challenge, many consultants and entrepreneurs are starting to rent office space together, while all paying a share of the rental cost. You can benefit by not only making efficient use of the space, but by working with other professionals to share ideas, pass off clients, and get new business. It’s a great way to network and to reduce your overhead all at the same time.
Restaurants and Eateries
If you’ve always wanted to open a restaurant, and are hoping to do so in the future, you’re going to need a space to do it in. What kind of restaurant you want impacts the type of space you will need to run it.
Franchises and fast food chains tend to find the best homes within other retail spaces, such as malls and strip malls, while bigger restaurants generally find more success as standalone buildings.
You’ll need to think strategically about where your customers are to decide which space would be best for you. If the purpose of your business will be convenience, commercial space within busy shopping areas will likely net you more profit (though it may cost more to rent).
If part of your business model is the dining experience, it should still be easily accessible, but its success may depend on if it’s a separate building.
Retail space may be the most straightforward, as you’ll want to target where shoppers are already gathering. This is true for clothing stores, outlet centres, and other item-based businesses (electronics, books, gift shops, etc.).
However, there are certain businesses that could profit from separate and standalone shops instead of parts of a larger shopping complex.
Small businesses, like used book stores, niche shops and boutiques, and specialty stores may be better adapted to having their own space since they allow you more choice over your location. Retail space in a shopping centre can be costly, but renting space, such as an older commercial building or shop in a different part of town could save you a nice bit of cash.
Should I Buy or Rent?
Commercial real estate tends to be pricey. Some spaces only allow for leasing, such as malls or office buildings. A standalone building may cost you less, but unless you plan to rent it out, you won’t make any profit off of it.
Commercial real estate is mostly purchased by real estate investors, who renovate or upgrade the space, then lease it to other businesses.
Renting also takes a lot of the responsibility off of you, the business owner, since it’s up to the landlord to see to the building, arrange for payments, and ensure that all of the health and safety standards are met. As a small business owner, it can be a big weight off of your shoulders to only have to worry about the success of your enterprise, instead of managing a new real estate investment on top of it.
Getting Serious About Small Business
If you are thinking about either buying or renting a commercial space, it’s likely that you have a business already and have expanded to the point of needing professional space, or you’ve been planning your enterprise for years and are ready to take it to the next level.
The type of property that you choose can make or break your business, so think carefully about where your customers are, what you need to make the space efficient, and what you can afford.
What other questions do you have about commercial real estate?